By Elijah Nicholson-Messmer
Consumers have reckoned with higher gasoline prices for months, but the impacts of the Iran war have quietly begun rippling through other sectors of the economy.
In March, prices for polyethylene, the most commonly used plastic globally, rose to their highest point in nearly four years. That's a problem for companies that need the material for their products, as they try to navigate what experts say is a "historic" plastic market.
"This is different than anything we've seen for the world, for the North American market," said Joel Morales, vice president of polyolefins Americas at Chemical Market Analytics.
Plastic prices previously spiked after Russia's 2022 invasion of Ukraine drove oil past $100 a barrel. As a rule of thumb, every $10 rise in oil adds about five cents per pound to polyethylene, according to Morales. Put another way, a 10% increase in oil prices typically lifts polyethylene prices by roughly 3.5%, according to a Barron's analysis of the past five years of price data.
But polyethylene prices have traded at a significant premium to what oil prices alone would imply since the start of the Iran war.
That dynamic is no coincidence. Plastic production has a near total reliance on fossil fuel feedstocks, making the price of oil a critical input for an ever-expanding array of plastic-intensive industries.
Companies feel the impact of those price hikes almost immediately, but it can take months for the increases to reach consumers. That lag can create "margin pressure" for companies in the near-term, according to Christine Barnhart, head of industry engagement and alliances at Miebach Consulting.
"When input costs rise, companies don't always have the ability -- or the market conditions -- to immediately pass those increases through to customers," Barnhart said. "In the near term, that usually means some level of profitability pressure, particularly for plastic-intensive product lines. This tends to show up first and most visibly in consumer goods, where packaging is a significant and immediate cost component and pricing decisions are more frequent."
Data show that companies including Mattel and Procter & Gamble have historically had lower gross margins as plastic prices rose.
In a recent earnings call, P&G CFO Andre Schulten said that if oil prices continue to hover around $100 a barrel, the company would face an additional $1 billion in annual, after-tax costs compared with the time when oil prices were in the mid-$60 range before the war.
"There's a lot of room in our P&L to drive short-term productivity, and that would be the first place to go. Will it be sufficient to offset the full $1 billion after tax? Likely not," Schulten said. While representing only a small fraction of P&G's total expenditures, that hit is large enough to erase the company's expected annual earnings growth.
While that dynamic isn't always apparent across consumer goods companies -- gross margins at PepsiCo, Coca-Cola, and Unilever don't show a strong relationship to plastic prices -- it's clear that investors see the current price spike as a headwind for these companies.
That trend is reflected in broader measures of consumer staples stocks. Vanguard's Consumer Staples and Consumer Discretionary ETFs, two exchange-traded funds that track the two consumer-spending sectors, have lagged behind broader market measures, down 5.7% and up 3.7%, respectively, since the start of the war. The S&P 500 rose 7.6% over that same period.
For the P&Gs and Nestles of the world, experts say rising plastic prices are a costly, if manageable, headwind. But for the smaller companies upstream of those behemoths, the current environment could prove fatal.
Experts say the challenges facing private plastic converters -- the companies responsible for transforming raw plastic resin into finished products like packaging and bottles -- have real consequences for private credit funds and the growing number of people who invest in them.
"It's a crude analogy, but if you're living paycheck to paycheck, and your rent doubles in a relatively short period of time, you could be in trouble," Morales said. "So, some of these converters are facing that kind of challenge, and you're going to see some casualties."
These companies, which act as "shock absorbers" in the corporate world, are increasingly having to absorb higher input costs while often struggling to pass them on to customers, according to James Gellert, chairman and CEO of financial analytics firm RapidRatings International. To bridge that gap, many private plastic converters are leaning on credit.
"There's no question at all that the default rate is going to be higher than most private credit funds are disclosing," Gellert said.
While overall private credit default rates have been steadily climbing, experts like Gellert are also looking at more subtle signs of financial stress, including things like payment-in-kind restructuring events. The share of these so-called "shadow defaults," which include companies that accepted unexpected additional lending terms partway through their deals, have more than doubled over recent years, according to an analysis by investment bank advisor Lincoln International.
"Private credit players say 'Well, there's been very little disruption from a bankruptcy perspective or a default perspective.' But in fact they've restructured so many of the facilities with borrowing companies that that is the event," Gellert said. "The event isn't a bankruptcy or a default event, it's a restructuring event."
Of course, one sector's loss is another's gain. Shares of domestic plastic manufacturers, including Dow and LyondellBasell, have marked 52-week highs since the start of the war.
"The model is, you let the guy in Asia, Europe and South America who has to use oil to make plastics, they set the price," Morales said. "And then, if you're a low-cost producer, you just sell at that price and make money."
For North American producers like Dow and LyondellBasell who use ethane from cheap natural gas to create polyethylene, that dynamic has been a "tremendous benefit," Morales said.
"In the case of companies like Dow and LyondellBasell, who were potential takeover targets because they were at some of their lowest valuations in decades, that has completely changed now...their costs are going down and all these price increases are pure margin. You couldn't write a better script for how to return profitability to North American plastic producers."
That dynamic is expected to continue for the near future. Following the breakdown of peace talks between the U.S. and Iran, S&P Global analysts raised their oil price outlook for the rest of the year, now expecting WTI and Brent crude to remain well-above prewar prices at $95 and $100 a barrel, respectively. And plastic costs are likely to remain elevated with them.
"Demand destruction," as Morales put it, could put a ceiling on rising plastic prices, but a supply-demand imbalance will make it difficult for companies to dodge the greater expense.
Write to Elijah Nicholson-Messmer at elijah.nicholson-messmer@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
May 12, 2026 02:00 ET (06:00 GMT)
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